Strong demand lifts Golden Eagle's IPO price to top

Department store operator raises $179 million; Retail orders exceed institutional demand.
Golden Eagle Retail Group has priced its initial public offering at HK$3.15, or at the top end of the price range, allowing the mainland department store operator to raise HK$1.42 billion ($179 million).

ABN AMRO Rothschild and Goldbond Securities were joint global coordinators and bookrunners for the offering, which yet again highlights strong demand for Chinese consumer concept stocks.

Retail investors in particular swarmed to the offering, banking on hopes for the same kind of secondary market performance as fellow department store operator Parkson Retail. The latter is up 42% year-to-date and has seen its share price more than double since its trading debut on November 30.

Riding on the same wave of optimism, container board manufacturer Nine Dragons Paper has also gained 39.7% since it started trading on March 3.

As a result of the strong retail demand, Golden Eagle, has needed to increase the size of the retail tranche to 50%. This left fewer shares for institutional investors to compete over and consequently little room for them to talk the valuation down. The order book was said to have contained virtually no price sensitivity.

The institutional book ended up being about 47 times covered at the post-clawback size with about 250 investors putting in orders. Based on its original size (90% of the total deal), the institutional tranche would have been about 26 times covered.

The bookrunners did not limit the size of individual orders, but investors say they were advised not to inflate their requests given the limited amount of shares available. About 60% of the orders came from Asia, 23% from Europe and the remaining 17% from the US. There was also said to have been a slight overweight towards traditional long-only funds, while about 40% if the demand came from hedge funds.

There is a 15% greenshoe that may increase the size of the institutional tranche by another 67.5 million shares and could boost the total deal size to HK$1.63 billion ($206 million).

The retail tranche was about 307 times covered, which meant it froze up HK$43.5 billion worth of cash from the local market. Retail investors also asked for a hefty 13.8 billion shares, which was more than the 10.8 billion ordered by institutions.

ôChina is definitely the market people want to be in, and within different sectors retail is the preferred one,ö notes one observer. ôGolden Eagle offers another opportunity to get exposure to this sector.ö

The company, which is a spin-off from a private conglomerate founded by Chinese American entrepreneur Roger Wang, offered 450 million shares at a price of HK$2.50 to HK$3.15 each. This pitched the company at a significant discount to larger rival Parkson.

At the final price, Golden Eagle is valued at 26.2 times 2005 earnings, which the company is estimating will be at least Rmb225 million, or at 21.4 times 2006 earnings based on the consensus profit forecast from ABN Amro Rothschild and Goldbond.
This compares with ParksonÆs P/E of 37.7 times on a 2005 basis and 30.1 times on a forecast 2006 basis.

Investors generally agree that Parkson, which is more heavily focused on acquisitions, deserves to trade at a premium, although Golden EagleÆs better margins and higher revenue per square metre did attract some attention during the roadshow, observers said.

The current 30% discount to Parkson may be a bit steep and should narrow as the stock starts trading, says one market watcher, noting that ôthe company has done well without being too greedy.ö

Golden Eagle wants to grow by acquisitions and according to the listing document, it plans to open its second store in Xian in the second quarter û the first under its own brand name - and a second store in Nanjing in the fourth quarter or early 2007. It is also aiming to open a new store in Taizhou early next year and will set aside HK$300 million of its net proceeds for acquisitions or to open three to four new stores over the next two to three years.

Golden Eagle currently has six department stores with a total retail space of 115,000 square metres.

Investors were less impressed by the fact that 75% of the base deal size, or 337.5 million shares, were secondary shares provided by Wang, who will use about $85 million of his proceeds to repay a loan given to him by the company. At least most of the money will stay with the company and Wang, who acts both as chairman and CEO of the company, was getting some credit for trying to clean up the books before the listing.

Golden Eagle International Group is also active within real estate, automobile marketing and sales, software, medicine and other investments.

The shares are scheduled to start trading on Hong KongÆs main board on March 21.

¬ Haymarket Media Limited. All rights reserved.

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